AQR’s Momentum Funds (A) Case Solution & Answer

After the comparison of Decline Spread portfolio returns, Quintile Spread portfolio returns, UMD Spread portfolio returns and Median Spread portfolio returns, the Median Spread portfolio returns has the highest return out of all these returns in almost all the decades, however the data for 1920s consist of only three years so it has the highest returns. UMD spread portfolio method has the second highest returns and then the Decile Spread portfolio has the highest returns with Quintile Spread portfolio returns having the least average returns compared to all the other returns.

The Sharpe ratio is mainly used to compare the change in the portfolio’s overall risk-return characteristics when a new asset or asset class is added to it. The Sharpe ratio indicates that although the hedge fund investment is risky exposure however, it has the ability to improve the risk return characteristics of the combined portfolio and adds the diversification benefit and if the addition of the new investment lowered the Sharpe ratio, it should not be added to the portfolio of investments. The retail strategy of AQR is different from the traditional momentum approaches as it will be available to the investors and it might end up in updating the portfolios more frequently than usual. The expected returns are more than the traditional strategies which is a favorable sign for launching the retail funds and expanding the business through it. The comparison in exhibit 5 is important for the selling of momentum funds that the company is preparing to offer. Hedge funds usually use long-short strategies as it is the simplest strategy to understand and there are a variety of sub-strategies within this category. In the long-short strategy, the manager can either purchase the stock that he feels is undervalued or sell stock he feels is overvalued. In most cases, the firm usually generates positive results and a positive exposure to the markets.

The long position strategy is based on the idea that the long positions can only be tied in securities. It says that in order for an asset to be long, the buyer will benefit from the increase in prices only. On the other hand, the short position strategy implies that in order for an asset to be short, the buyer will benefit only when the prices of the asset fall. The concept of the momentum effect for investment is also based on the same concept.

The momentum effect implies that the investments tend to benefit from the increase in the asset prices, as it depends on the idea that those assets whichperform positively in the past are likely to perform positively in the future too. This way it is more likely to be important for hedge funds to use the long-short strategy to benefit from the momentum effect.

The purpose of the indexes is to show the investors that the investment in the new retail policy will be an attractive option for them to increase the sales.However, there are also some disadvantages of publishing the indexes as the retail investors do not have the knowledge compared to the traditional momentum funds investors.

The investors might not be able to find out what they are looking for which can hurt the company however, it is important for AQR to publish them even if they are doing it just to complete the formality.

However, publishing them before launching the funds can also help in more sales for those retailers who are willing to invest heavily in the funds and want to complete their knowledge before investing in the funds, which will make them feel more secure and they would not have to find the information through other sources.

The Efficient-Market Hypothesis (EMH) says that the financial markets are always efficient in terms of information. Hence, an individual or an investor cannot consistently achieve positive returns, or returns in excess of the average market by adjusting the risk, provided that the information is available at the time of the investment.

The hypothesis argues that market efficiency does not mean that there is no uncertainty about the markets. The market efficiency only implies that the perfect world may not always exist, and that the market is practically efficient for investment by most of the individuals, provided that these individuals take rational steps.

The hypothesis says that it is never possible to test the market efficiency in order to prove or disprove it. However, the actual prices can be used to see whether it holds true or not. Usually this fails and then the investors argue that the market is inefficient. However, the market is never inefficient; it is just the irrational behavior of the investors that causes anomalies and irregular patterns in the markets, leading to systematic risks.

Managing the funds requires close attention to cost and the risk in order to capitalize on the opportunities and minimizing the tracking errors and increasing the maximum returns on the funds. Managing the funds is often a difficult procedure. However, the common practice is to control the risk of the active managers by imposing the constraints on tracking the risk. Nonetheless, the setup is not wholly efficient……….

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